Today, the Basel Committee issued a second proposal to revise the risk-based capital requirements for securitization exposures. In developing the proposal, the Basel Committee took into account comments received on its first proposal and the results of a quantitative impact study (QIS).
Compared with the Basel Committee’s first proposal, the major changes in the second proposal relate to the hierarchy of approaches for securitization exposures and the calibration of capital requirements.
Proposed hierarchy of approaches. The Basel Committee proposes the following hierarchy of approaches for determining the capital requirement for securitization exposures:
- Where banks have the capacity and supervisory approval to do so, they may use an internal ratings-based approach to determine the capital requirement based on the internal ratings based approach capital charge for the underlying pool of exposures, including expected losses.
- If the internal ratings-based approach cannot be used for a particular securitization exposure, an external ratings-based approach may be used (assuming that the use of ratings is permitted within the relevant jurisdiction – note that the Dodd-Frank Act prohibits references to external credit ratings in U.S. federal regulations).
- If neither of the above approaches can be used, a standardized approach would be applied. This is based on the underlying capital requirement that would apply under the standardized approach for credit risk and other risk drivers.
Risk-weight floor: The Basel Committee proposes to set a 15% risk-weight floor for all three approaches, instead of the 20% floor contained in its first proposal. The U.S. Basel III final rule also contains a 20% risk-weight floor for securitization exposures.
Comparison chart – risk weights for securitization exposures under the external ratings-based approach: The following table compares the risk weights under the external ratings-based approach in the Basel Committee’s second proposal with the revised ratings-based approach in the Basel Committee’s first proposal and the ratings-based approach in the existing Basel capital framework for senior tranches.
Comments on the second proposal are due on March 21, 2014.
Basel Committee, Revisions to the Securitisation Framework (Consultative Document) (Dec. 19, 2013) available here: http://www.bis.org/publ/bcbs269.pdf